Western Interest in Islamic Banking

Suggesting Wall Street could learn from Islamic finance might surprise, or even irritate, some people. But the fact that this form of finance prohibits interest charges – and resists the kind of disaster currently underway in Western finance markets – has drawn a lot of ‘interest’ in Europe, says Akram Belkaïd. The suggestion that Wall Street should adopt the rules of Islamic finance might surprise, or even irritate, some people. But there is one very simple reason why the idea is under serious consideration around the world: the fact that this form of finance, now worth more than $400bn, prohibits interest charges which may make it more resistant to the damage caused by subprime mortgages and speculation on the derivatives markets.

During Pope Benedict XVI’s visit to France in September, an unexpected editorial by Vincent Beaufils, in the French weekly Challenges, tackled the issue head on. The magazine’s editor pointed out that at a time when the world was undergoing “a financial crisis that has swept aside every sign of growth, we would be better reading the words of the Qur’an than those of the pontiff.” He continued: “If the bankers who are so desperate to profit from equity capital had shown even the slightest respect for sharia principles, we wouldn’t be in this mess.” Beaufils ended by praising bankers from the Gulf “who refuse to compromise a sacred principle: money must not produce money” — a principle translatable, in modern financial terms, as: “Any credit must be matched by clearly identified assets.”

The editorial has spread across the internet in various languages, often accompanied by the observation that Islamic banking remains subject to safeguards that international finance abandoned in the name of deregulation. Several Arab television stations, including Al-Jazeera, devoted special programmes to the theme, in which they speculated about the possibility of a flow of savings from non-Muslim countries to Islamic financial institutions. But the Central Bank of Bahrain, the world centre of Islamic finance, remained cautious: “The reason the region’s banks have avoided the subprime crisis is because they lack the technical and human resources to invest in products of this type.”

Nevertheless, one French banker working in Dubai expected Islamic finance to take advantage of the crisis and expand in the West: “In countries with significant Muslim communities, the current crisis will give Islamic banks a marketing advantage… They are already promoting the fact that their businesses are sharia-compliant; now they will begin to emphasise how they avoided the deregulation of the financial system.”

Not that the sector is immune to accidents. During the 1990s, the spectacular collapse of Islamic banks in Egypt halted their development in Muslim countries. And one Tunisian banker, who views the establishment of such banks in his country with extreme suspicion, recalled that the International Monetary Fund (IMF) had sounded the alarm on several occasions, calling upon them to be more transparent and to observe standard international accounting and prudential practices.

Other experts are concerned about the increasing sophistication of the investments offered by Islamic banks. In order to get round the prohibition on interest, these products are often tied to tangible assets like property or raw materials – volatile sectors, targeted by speculators, which could undermine the funds that depend upon them. But such reservations are unlikely to halt the rise of Islamic finance. Crisis or no crisis, more than 10 major conferences on the topic are planned in Europe and North Africa over the next few months.